3 No. 41-62. 5, pp. 3 No. 1-52. 118-132. 2, pp. To unlock this lesson you must be a Study.com Member. The institutional theory involves an analysis of how few of the institutions’ social systems comprising outlines, rules, standards and procedures, become recognized as commanding strategies for institutional behavior (Scott, 2004). and Iqbal, Z. 8, pp. In 1983, DiMaggio and Powell elaborated on the work of Meyer and Rowan (1977) on isomorphism to the organizational field level (micro-level) and from the social level (macro-level). Application of institutional theory on Shariah governance framework. and Pellegrini, M. (2006a), “Corporate governance in institutions offering Islamic financial services: Issues and options”, World Bank Policy Research Working Paper 4052, World Bank. The most basic principle and distinct characteristic to the institutional theory is conformity. Hamid, S., Craig, R. and Clarke, F. (1993), “Religion: a confounding cultural element in the international harmonization of accounting?”, Abacus, Vol. Pfeffer, J. 13 No. Similarly, D‟Arcy and Hovav (2009) advocate application of institutional theory to study the relationship between organizational characteristics and security best practices. Not sure what college you want to attend yet? (2002), “Using institutional theory to reframe research on academic drift”, Higher Education in Europe, Vol. Get the unbiased info you need to find the right school. So to give you an answer to the original question, institutional theory gives us a way to understand how organizations might navigate rules and norms of the system in order to appear legitimate and survive. 263-280. 1, pp. Second, the institutional theory provides a more suitable basis when considering a Shariah governance framework for Islamic banks because of its capacity to deal with operational guidelines and procedures for organizations. Gambling, T. and Karim, R.A.A. Parsons, T. (1956), “Suggestions for a sociological approach to the theory of organizations”, Administrative Science Quarterly, Vol. (Department of Accounting and Finance, Cardiff Business School. Institutional theory seeks to explain organizational communication in terms of shared pre-existing rules, beliefs, and norms in the external environment of organizations. Earn Transferable Credit & Get your Degree, Resource Dependency Theory: How External Resources Affect Organizational Behavior, Agency Theory: Relationships of Principals & Agents, Rational Choice Theory: Definition & Principles, Resource-Based Theory: Path to Competitive Advantage, What is Stakeholder Theory? 571-610. Parsons, T. (1960), Structure and Process in Modem Societies, Free Press, Glencoe, IL. What are some strategies for harnessing and developing institutional knowledge? 299-313. Chakrabarty, S. and Bass, A.E. And organizations may all come to look alike in terms of their formal ceremonial aspects, but that doesn't really mean … Institutional theory emphasizes the normative impact of the environment on organizational activity. Tolbert, P.S. Scott, W.R. (2004), “Reflections on half a century of organizational psychology”, Annual Review of Sociology, Vol. As a member, you'll also get unlimited access to over 83,000 726-743. Explaining Shariah governance concerning managerial frameworks, three theories, namely, agency theory (Jensen and Meckling, 1976), stewardship theory (Donaldson and Davis, 1991) and stakeholder theory (Freeman, 1984), have generally been espoused in prior literature (Obid and Naysary, 2014; Al-Nasser Mohammed and Muhammed, 2017). (2020a), “The influences of board of directors and management in Shariah governance guidelines of the Islamic banks in Bangladesh”, Journal of Islamic Accounting and Business Research, Vol. 3, pp. 1, pp. Bhatti, M. and Bhatti, M.I. Numerous organizational logics are submitted for institutions and persons, and the related parties in organizational logics acknowledge prejudiced independence for institutions and individuals. 3, pp. The institutional theory depends, heavily, on the social constructs to help define the structure and processes of an organization. 11 No. 875-906, doi: 10.1007/s10997-015-9322-4. 20 No. (1995), “The nature and rational of a conceptual framework for financial reporting by Islamic banks”, Accounting and Business Research, Vol. (Department of Accounting and Finance, Faculty of Economics and Management. Published by Emerald Publishing Limited. Institutional theory is also acknowledged as a theoretic posture that depicts rational mythologies, isomorphism and legitimacy (Scott, 2008) illustrating “how” organizations are responsible for their social obligations and practices of these characteristics (Feldman and Rafaeli, 2002; He et al., 2007). Meyer, J. and Rowan, B. 250-271. 3, pp. 39 No. Section 2 provides a discussion of our critical review of the literature on the theoretical frameworks and evaluates these in the context of Islamic banks and a Shariah governance framework. Institutional theory delivers a beneficial structure for realizing the social, financial and legal effects on the countries and institutions and their tactical replies to those effects (Covaleski and Dirsmith, 1988; Carruthers, 1995; Brignall and Modell, 2000). Still, another can make an effort to “manipulate” rules and norms by trying to impact and regulate them. ahead-of-print. The paper and Gibbs, B.W. Since 1990s, institutional theory became popular despite its conceptual ambiguities such as institution, institutionalization and institutionalism, and the way macro/micro institutional factors are reconciled. 34 No. The raison detre and modus operandi of Islamic Banks is total religious or “Shariah compliance” (Ahmad and Haron, 2002; Mettawa and AlMossawi, 1998; Rashid et al., 2014; Archer and Karim, 2002). The most important of these problems is the generally static nature of institutional explanations. Pfeffer, J. and Salancik, G.R. 266-289. Explain Institutional Theory and the various processes of isomorphism. (2012), “An empirical investigation into the role, independence and effectiveness of Shari’ah boards in the Malaysian Islamic banking industry”, PhD Thesis, University of Cardiff. 15 No. Have you come across the concept before? and Bhatti, M.I. The authors also highlighted the societal, economic and legal environment of Islamic banks in relation to the propositions of institutional theory. It deliberates on the process by structures containing application, regulative, normative and cultural cognitive, which is recognized as commanding strategies for societal behavior. Uniquely to Islam, Muslims and Islamic organizations are accountable to God and are required to comply with a strict ethical code. (1981), “Management as symbolic action: the creation and maintenance of organizational paradigms”, in Cummings, L. and Staw, B. 43-63. 23 No. Support for Institutional Theory: Rowan, Tolbert, and Zucker. (2007), “Performance implications of nonmarket strategy in China”, Asia Pacific Journal of Management, Vol. 83 No. 30 No. 56, pp. The theory helps deliver a structure for recognizing how existing practices and standards amongst similar organizations influence the way that regulation (i.e. 20 No. Researchers have also focused on the perceptions of legitimacy in primary sociological studies (Parsons, 1956, 1960; Weber, 1978). Brignall, S. and Modell, S. (2000), “An institutional perspective on performance measurement and management in the ‘new public sector”, Management Accounting Research, Vol. 282-311. (1977), “The role of institutionalization in cultural persistence”, American Sociological Review, Vol. Moreover, Yeo and Youssef (2010) examined the corporate image of Saudi Arabian Islamic banks over corporate management, corporate communication and financial prospects. 63-85. Majeed, S., Aziz, T. and Saleem, S. (2015), “The effect of corporate governance elements on corporate social responsibility (CSR) disclosure: an empirical evidence from listed companies at KSE Pakistan”, International Journal of Financial Studies, Vol. 96-109. 13 No. Leader-Member Exchange Theory and Organizational Behavior, Quiz & Worksheet - Institutional Theory in HRM, Over 83,000 lessons in all major subjects, {{courseNav.course.mDynamicIntFields.lessonCount}}, Human Capital Theory: Characteristics & Investment, AMO Theory: Ability, Motivation & Opportunities, Organizational Behavior Theory in Business, Business 306: Strategic Human Resources Management, Biological and Biomedical Is the environmental order in accordance with the Paris Agreement possible by 2020? 5 No. 6 No. 340-363. This could contribute toward improving the overall image of Islamic banks, as it allows the proper application of Shariah rules thus helping to achieve organizational legitimacy and improving Shariah compliance quality critical for Islamic banks and their stakeholders. In addition, Meyer and Rowan (1977) and Zucker (1977) drew a novel tactic of an institutional predictor that emphasizes the social character and perception in the institutional inquiry. (2009), “Conceptualizing change in the institutional diversity of US colleges and universities”, The Journal of Higher Education, Vol. and Rahman, M.M. Visit emeraldpublishing.com/platformupdate to discover the latest news and updates, Answers to the most commonly asked questions here. It is also affected by normative pressures, sometimes ascending from the internal and outsider source, i.e. In this regard, to overcome this limitation, the institutional theory has been adopted in this study, where this theory describes the operational guidelines and procedures for the organization. 145-179. 16 No. and Feroz, E.H. (2001), “Institutional theory and accounting rule choice: analysis of four US state governments' decisions to adopt generally accepted accounting principles”, Accounting, Organizations and Society, Vol. (2006), “Corporate governance in Islamic perspective”, Corporate Governance, Vol. For instance, institutional theory recommends a “presumed unidirectional coercive effect of laws and regulations” (Morphew and Huisman, 2002) that may enhance or decline institutional multiplicity. 20 No. However, institutional theory refers to the ability of the countries and institutions to implement alike (Shariah governance) structures and exercises as isomorphism (DiMaggio and Powell, 1983). 33 No. and Hsu, W.C. (2013), “A study of the institutional forces influencing the adoption intention of RFID by suppliers”, Information and Management, Vol. 3 No. Ashforth, B.E. Yet, we find substantial biases and omissions in the application of institutional theory. Carmona, S. and Ezzamel, M. (2006), “Accounting and religion: a historical perspective”, Accounting History, Vol. Oliver, C. (1988), “The collective strategy framework: an application to competing predictions of isomorphism”, Administrative Science Quarterly, Vol. Kamla, R. and Alsoufi, R. (2015), “Critical Muslim intellectuals’ discourse and the issue of ‘interest’ (rib¯a): implications for Islamic accounting and banking”, Accounting Forum, Vol. (1976), “Theory of the firm: managerial behaviour, agency costs, and ownership structure”, Journal of Financial Economics, Vol. 91 No. All rights reserved. 21, No. 16 No. Crucially, without effective governance mechanisms in place, Islamic Banks cannot deliver the religious and ethical legitimacy that usually the stakeholders require. A Shariah Supervisory Board is defined as “an independent body entrusted with the duty of directing, reviewing, and supervising the activities of Islamic Banks for the purpose of Shariah compliance and issuing legal rulings relating to Islamic banking and finance” (AAOIFI, 2005). Enrolling in a course lets you earn progress by passing quizzes and exams. This paper aims to show the relevance of the application of “institutional theory” in the Shariah governance framework of Islamic banks. This suggests that rational ideas of corporations are the key power for institutions to adjust applications and processes to improve their legitimacy and existence (Meyer and Rowan, 1977). 1, pp. 48 No. Burgess, J. 519-533. Mizanur Rahman. The overall surge of articles with institutional perspective in entrepreneurship research is promising. The proper application of this theory may ensure the application of Shariah principles and thereby enhance the legitimacy of its stakeholders. He, Y., Tian, Z. and Chen, Y. and Muneeza, A. - Definition & Systems, Quiz & Worksheet - Calculating Future Value, Quiz & Worksheet - Calculating Net Present Value, Quiz & Worksheet - Calculating Depreciation Expense, Quiz & Worksheet - Calculating Interest Expense, Quiz & Worksheet - Calculating Gross Profit Margin, California Sexual Harassment Refresher Course: Supervisors, California Sexual Harassment Refresher Course: Employees. Choose one of the three main class theories discussed in class, Marx, Weber and Durkheim, and compare it to Institutionalist class th. 1, pp. Prior literature also postulates that Islamic banks need to improve their image and reputation based on the quality of Shariah compliance as this differentiates them from their conventional counterparts (Belal et al., 2015; Mallin et al., 2014) [3]. Furthermore, in an Islamic context, Kamla (2009) rightly asserts that if Islam is purely practiced and without unnecessary laxity, it will accomplish its described socio-economic ambitions. Mallin, C., Farag, H. and Ow-Yong, K. (2014), “Corporate social responsibility and financial performance in Islamic banks”, Journal of Economic Behavior and Organization, Vol. In sum, the institutional theory suggests that institutions implement structures, systems and processes which are apparent as legitimate in culture to enhance their probabilities of existence. 769-784. It deliberates on the process by structures containing application, regulative, normative and cultural cognitive, which is recognized as commanding strategies for societal behavior. In the literature, it is often found that institutional theory is used as the theoretical framework to explain the development and application of accounting. Thus, this study, therefore, adding a novel dimension to the literature by arguing why institutional theory, is more pronounced (as compared to the other theoretical frameworks) in the formation and discharge of the roles, powers and functions by the different governance organs (such as regulators, the board of directors, management and Shariah supervisory board) operating in this unique corporate governance landscape. (1995), “Accounting, ambiguity, and the new institutionalism”, Accounting, Organizations and Society, Vol. 75-83. This study is heavily dependent on prior research rather than empirical investigations. Academic departments consist of researchers grouped by subject, each of whom is relatively free to select research projects. Lustick himself notes that identifying the inability of institutions to adapt as a symptom of being stuck on a local maxima within a fitness landscape does nothing to solve the problem. - Definition & Ethics, What is Feminist Theory? imaginable degree, area of (2010), “Communicating corporate image into existence: the case of the Saudi banking industry”, Corporate Communications: An International Journal, Vol. Therefore, Islamic banks are also affected by the coercive, normative and mimetic pressures in relation to their unique organizational setting and implement the “acquiesce,” “compromise,” “avoid,” “defy” and “manipulate” tactics to reply to pressures. Alam, M.K., Rahman, S.A., Mustafa, H., Shah, S.M. 7 No. research could leverage socio-organizational theory, e.g. Kalbers and Fogarty (1998) claim that “organizational structures have become symbolic displays of conformity and social accountability”. Furthermore, the name of the banks, image, privacy, friends as well as family inspiration and arrangement of quality services [7] are similarly significant to the customers in their decision-making process to choose a bank (Mettawa and AlMossawi, 1998). The image of Islamic banks can comprise being Islamic, modest, fair, constant and clear (institutional image), along with being friendly, truthful, pleasing, leading, trustworthy and protected (performative images). In this lesson, you'll explore institutional theory, including its history and characteristics, particularly with regard to environment and social structure. From a Western perspective, the main difference between CG and the religiously driven Shariah governance is its epistemological orientation (Choudhury and Alam, 2013; Nathan and Ribieri, 2007; Grassa, 2013; Platonova et al., 2016). 3, pp. Moreover, only the effectiveness is not the sole way to survive but attaining legitimacy and faith is a new most significant survival approach. 177-194. The study of institutions has a long pedigree. just create an account. In this regard, Islamic financial institutions were acknowledged with the persistence of giving Islamic principle-oriented banking and financial activities, and this concept should be accepted by all of the stakeholders which emphasize cultural cognitive and normative components of institutional theory (Zucker, 1987; Schur et al., 2005). As researchers, in recent years, have paid attention to institutional theory to illuminate variations in institutional multiplicity (Morphew, 2009; Morphew and Huisman, 2002), the theory does, nevertheless, have several limitations. (2014), “Quality perception of the customers towards domestic Islamic banks in Bangladesh”, Journal of Islamic Economics, Banking and Finance, Vol. Another word for this system is institutional environment. Grais, W.M. Early institutional theory researchers in political science emphasized the managerial schedules and legal structures that form governance frameworks (Wilson, 1889; Willoughby, 1896; Burgess, 1902). 71-92. 154-171. Ullah, S., Harwood, I.A. It also suggests that the components of proper structures, strategies and processes were generally generated from the mythologies relating to suitable social and economic customs (DiMaggio and Powell, 1983). 20 No. 367-386. Grassa, R. (2013), “Shariah supervisory system in Islamic financial institutions new issues and challenges: a comparative analysis between Southeast Asia models and GCC models”, Humanomics, Vol. 49 No. 4, pp. (2006), “The importance of Shari’ah supervision in Islamic financial institutions”, Corporate Ownership and Control, Vol. Finally, institutional theory enables consideration of the intricate relationship between institutional theory and a Shariah governance framework and provides the reason for the acceptance of Shariah governance as a management tool that is explainable by the concept of organizational isomorphism (DiMaggio and Powell, 1983), and organizational legitimacy (Ashforth and Gibbs, 1990; Scott, 2004). 2, pp. 36 No. First, we contribute to prior literature on Shariah governance as it provides valuable insight on why institutional theory is more pronounced (as compared to the other theoretical frameworks) in the formation and discharge of the roles, powers, and functions by the different governance organs (such as regulators, the board of directors, management and Shariah supervisory boards) operating in this unique corporate governance landscape. This is known as institutional isomorphism, or when organizations try to make their actions consistent with the expectations of the institutional environment. It was DiMaggio (1998) who expanded institutional theory discourse to religious institutions by concentrating on the concepts of the “procedural,” “figurative understanding” and “cultural legitimacy.” Besides, he claimed that institutional theory is relevant and equivalent to the goals of Islamic institutions while conventional business institutions tend to focus more on coherent factors and an image centering on the maximization of profit [6]. (2014), “Corporate governance in microfinance institutions: board composition and the ability to face institutional voids”, Corporate Governance: An International Review, Vol. In short, the Shariah supervisory board is associated with the inner governance structure of the organization and performs as an in-house monitoring authority within the institution. The remainder of this paper is as follows. Researchers can apply institutional theory in the areas mentioned above by using a quantitative and qualitative methodology through regulatory policies, guidelines and regulations. Institutional theory has arguably become a popular and powerful explanatory tool for studying various organisational issues, including those in the context of higher education. In this case, the authors also found that institutional image is the central concern in Islamic banks and conduct their banking affairs based on Shariah principles and how the Shariah is the main motive for Muslims to select Islamic banks. Oliver, C. (1997), “Sustainable competitive advantage: combining institutional and resource based views”, Strategic Management Journal, Vol. 1, pp. Thus, the countries and institutions can implement particular Shariah governance exercises not only for the enhancement of performance or drive to financial development but also to attain legitimacy in culture (Alam et al., 2020c). This study applied library research to investigate the application of institutional theory in the Shariah governance framework of Islamic banks. We can see an increasing variation of methods being applied and a growing mutual interest between entrepreneurship and institutional theory researchers. 4, pp. Thus, future researchers can apply institutional theory in Shariah governance practices and implementations of setting up rules by the regulators and respective institutions. Some of AU's norms, policies, and ways of doing business were contrary to the norms of the institutional environment. Shariah principles describe the roles and functions of all multiple parties toward the institution as well as to society at large. (2006), “Islam, nature and accounting: Islamic principles and the nation of accounting for the environment”, Accounting Forum, Vol. By outlining the roles and powers of the various stakeholders along with the regulators, institutions, centralized Shariah supervisory board, the board of directors, Shariah supervisory board, management and Shariah officers, the institutional theory acts as an important role in the enhancement of organizational structure and performance by balancing the stakeholders’ roles. (2017), “Exploring the ‘social failures’ of Islamic banks: a historical dialectics analysis”, Journal of Islamic Accounting and Business Research, Vol. 922-928. The authors would like to thanks the Editor-in-Chief and anonymous reviewers for their valuable comments and suggestion for the improvement of this manuscript. (2007), “Corporate governance reform as institutional innovation: the case of Japan”, Organization Science, Vol. Abdul-Baki, Z. and Uthman, A.B. Fundamentally, the Shariah supervisory board assures that Islamic banks are conducting their operational functions in accordance with Shariah (Alam et al., 2020e). Different components of institutional theory explain how these elements are created, diffused, adopted, and … 265-276. (1902), Political Science and Comparative Constitutional Law, Ginn, Boston. Institutional theory highlights the structure and arrangement of an institution’s setting, proposing that the suitable structure of organization’s is not simply a combination of resource dependencies and mechanical demands, but is inclined by structural arrangements, containing rational mythologies, perceived knowledge legitimized over the enlightened structure and by the occupations, community belief and regulation (Meyer and Rowan, 1977; Zucker, 1977; DiMaggio and Powell, 1983; Scott, 1987). Karbhari, Y., Muye, I., Hassan, A.F.S. 26 Nos 7/8, pp. Compare and contrast Ayres's version of the Veblenian Dichotomy and Fagg Foster's version of the Dichotomy. (2020d), “A Central Shariah regulatory authority for the Islamic banks in Bangladesh: Legalization or formation”, The Journal of Asian Finance, Economics and Business, Vol. Roberts, B. and Greenwood, R. (1997), “Integrating transaction cost and institutional theories: toward a constrained-efficiency framework for understanding organizational design adoption”, Academy of Management Review, Vol. There are three main ways through which organizations can achieve consistency with the institutional environment. 1, pp. Overall, from an institutional theory lens, Shariah governance is a holistic overview of relationships to various parties related to Islamic banks. (2019a), “Sharī‘ah governance framework of Islamic banks in Bangladesh: practices, problems and recommendations”, Asian Economic and Financial Review, Vol. 2, pp. In this regard, the Shariah supervisory board is considered crucial to the Shariah governance framework of Islamic banks. This is called one kind of institutional culture which emphasizes cultural-cognitive and normative components of institutional theory (Zucker, 1987; Schur et al., 2005). Schur, L., Kruse, D. and Blanck, P. (2005), “Corporate culture and the employment of persons with disabilities”, Behavioral Sciences and the Law, Vol. Institutional theory provides an account of the growth and structure of the academic and state research sectors, as successful organizations in industrialized nations operate as models far from their original contexts. and Huisman, J. Tsai, M.C., Lai, K.H. 708-725. 11 No. 109-131. Scott, W.R. (2008), Institutions and Organizations: Ideas and Interests, Sage Publications, Thousand Oaks, CA. 5, pp. The authors have found the applications of institutional theory in various researches related to IS/IT at individual and organizational levels. 59-65. The need for achievement as the name itself suggests is the urge to achieve something in what you do. If anything, institutional theory today is challenged to maintain its critical gaze over the taken-for-granted. 151-169. Institutions limit some forms of action and facilitate others. 17 No. 4, pp. 4, pp. This study highlights institutional theory to serve best the development of operational strategies and structures of Islamic banks including the roles, functions and powers of the various stakeholders including regulators and those involved in the Shariah governance process of Islamic banks. Deephouse, D.L. Archer, S. and Karim, R.A.A. What is the Difference Between Blended Learning & Distance Learning? 25 No. Institutional theories as applied to politics posit two distinct forms of institutions' influence over policy and political action. In the context of this study, several governance accomplishments and structures are driven in Islamic Banks to fulfill legitimacy and accountability through the intricate role played by Shariah supervisory board ss as part of the overall governance framework. Alam, M.K., Rahman, S.A., Thakur, O.A., Bashir, M.A. Abu-Tapanjeh, A.M. (2009), “Corporate governance from the Islamic perspective: a comparative analysis with OECD principles”, Critical Perspectives on Accounting, Vol. Illustrating their work, researchers in the arena tend to work in two different aspects of legitimacy (Suchman, 1995). 1022-1054. (2013), “Interest free banking in Turkey: a study of customer satisfaction and bank selection”, European Scientific Journal, Vol. Finally, the application of institutional theory would enhance in Islamic finance areas. 180-199. 22-39. and Alam, M.N. Carpenter and Feroz (2001) describe this procedure as organizational marking, and they claim that this procedure does not necessarily make institutions more effective. Ahmad, N. and Haron, S. (2002), “Perceptions of Malaysian corporate customers towards Islamic banking products and services”, International Journal of Islamic Financial Services, Vol. AAOIFI (2005), “Governance Standards for IFIs”, No. 973-988. 39 No. Suchman, M.C. Besides, Deegan (2002) suggests that if society’s prospects concerning the legitimacy of a government or institution are not changed, then their “agreements” for presence are efficiently withdrawn by culture. 921-932. In this case, it generates a soft power relation concerning the macro (Institutional) and micro (distinct) levels (Zucker, 1987). Relies heavily upon category theory concepts, but in a proper way,! Multiple parties toward the institution as well as to society at large and conduct can make an effort to manipulate! Existing practices and implementations of setting up rules by the regulators and respective institutions ( ). ’ design and conduct cover other Islamic finance areas offering Islamic Financial Services board puts institutions at their individual might. Try refreshing the page, or contact customer support also find out more about Emerald Engage using institutional in. 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